WITH a China currency bill making its way through Congress, the debate over whether America ought to get tough with China is firing up yet again. The case for an aggressive American approach continues to look very weak to me. Some writers are taking on the idea that Chinese inflation is having much of an effect on its export competitiveness—that is, contributing to a real adjustment much larger than what’s observed in the nominal exchange rate. Kash Mansori makes an argument to that effect in this post, which has gotten a lot of attention. He compares CPI data in America and China and figures that Chinese prices have risen just 6.7% more than American prices since 2005—less of a contribution to adjustment, in other words, than one might have assumed.

That estimate seems unrealistically low to me. Looking at IMF figures on consumer prices and GDP deflators, the differential in inflation between 2005 and 2011 has been about 7 percentage points according to the former and 20 percentage points by the latter. The Economist put together an analysis of the real yuan-dollar rate and found that real appreciation has been significantly greater than nominal appreciation. From 2009 to early 2011, the analysis found, the yuan appreciated by just 4% in nominal terms, but by 17% in real terms, after accounting for inflation. The differential in wage growth has been more dramatic still. A Bureau of Labour Statistics report from earlier this year found that between 2002 and 2008, American manufacturing wages rose by just 20% while Chinese manufacturing wages doubled.

Meanwhile, other writers seem not to appreciate the trade-off that’s actually on the table. Noah Smith seems to imply that critics of a «get tough» approach mainly think there would be no benefit to a yuan appreciation. I readily agree that there would be some benefit to both China and America of an appreciation in the yuan. It’s difficult to demonstrate that there would be substantial benefit, however. Mr Smith cites economist Menzie Chinn in support of the point that a yuan appreciation would benefit both parties. Fair enough, but Mr Chinn has also written that a dearer yuan might not lead to a big increase in Chinese imports and might not have much of an effect in the absence of a broader Asian appreciation. He also cites Eswar Prasad’s argument that a yuan appreciation would likely have little impact on American employment. There is a benefit there, but it’s not at all sure to be a large one.

Meanwhile, the yuan is appreciating, by a meaningful amount in nominal terms and by even more in real terms. And there is some set of potentially serious risks to getting tough with China, including the possibility of a major trade dispute between the world’s two largest economies at a time of significant global uncertainty and broadly declining industrial output.

So the question is what the expected value of a get-tough approach is likely to be. How much faster an appreciation is American pressure likely to induce? It’s hard to see how China would tolerate much more appreciation. So we have a small increase in the rate of change of a policy with relatively small benefits, and against that we have the risk of a major trade dispute between the world's two biggest economies at the worst possible time.

The issue is not that there’s no gain from appreciation. It’s that an aggressive American approach seems unlikely to generate appreciation over and above the current rate at an acceptable cost. The onus is on supporters of a get-tough approach to show that the trade-off is worth the trouble, and so far they’ve done nothing of the sort.

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

Using survey data of market expectations, we ask which popular exchange rate models appear to be consistent with expectation formation of market forecasters. Exchange rate expectations are found to be correlated with inflation differentials and productivity differentials, indicating that the relative PPP and Balassa-Samuelson effect are common inputs into expectation formation of market forecasters.

Og fra konklusjonen:

Amid a plethora of exchange rate models, inflation and growth rates appear to be two robust factors that are considered in the formation of exchange rate expectations by market forecasters. The prominence of inflation points to the broad subscription to a version of purchasing power parity. The prominence of growth rates suggests the broad acceptance of the productivity-driven appreciation, either in terms of the classic Balassa-Samuelson effect or in terms of procyclical capital inflows. Other often-mentioned factors, including the current account balance, do not appear to play a common role in the exchange rate formation.

I remember back in 1993 the garbage thrown at then-Treasury Secretary Lloyd Bentsen when he said–quite reasonably–a stronger yen would be in America’s interest…

We have not grown up at all in eighteen years.

Christina Romer:

A Strong Dollar Isn’t Always a Good Thing: AT a recent news conference, Ben S. Bernanke, the Federal Reserve chairman, was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar…. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.

Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market…. [A]ll that ‘the exchange rate is the purview of the Treasury’ means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions….

Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise…. Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds…. The price of the dollar will again rise…. Both developments — brilliant American innovation and troublesome American budget deficits — caused the dollar to strengthen. Yet one is clearly a positive for the American economy, the other a negative. The point is that there is no universal good or bad direction for the dollar to move. The desirability of any shift in the exchange rate depends on why the dollar is moving.

It also depends on the state of the economy. At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries. But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while….

STRANGELY, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi…. But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation. To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation. The exchange rate is the purview of market economics, not of the Treasury or strong-dollar ideologues.

«The ads made me think, ‘This is easy,'» said Ouma, 52, an administrator with the Grand Prairie, Texas, police department.

Ouma used her credit card to fund an account with an online currency broker. Within a few weeks of swapping dollars for yen and euros, she said, her $3,000 of borrowed money was gone.

«Even if you make money for a little while, eventually you just end up losing,» she said.

Ouma made two mistakes: investing on credit and trying to make a buck by predicting changes in currency exchange rates, something best left to professionals, according to personal finance experts. But she has plenty of company.

At FXCM, 75% to 77% of customers lost money each quarter last year, according to newly required disclosures to the Commodity Futures Trading Commission. At Gain, which operates through http://www.forex.com, the number of unprofitable customers hovered between 72% and 79% every quarter last year, according to its filing.

Lots of leverage, lots of turnover

As if those statistics weren’t scary enough, the rules of currency trading allow investors to leverage every dollar they bet on a 50-to-1 ratio. This allows them to bet money they don’t have — a tactic that can boost profits but also losses.

The losses have triggered recent lawsuits and regulatory scrutiny — but haven’t stopped the swift growth of the industry, which barely existed a decade ago. Gain and FXCM went public on the New York Stock Exchange last December.

Executives with both firms say that they simply provide a conduit for people who want to trade currency, and that customers are given full disclosure of the risk.

«The majority of people today are on a quarterly basis not doing well,» Drew Niv, FXCM’s chief executive, acknowledged in an interview. «There’s lots of education showing, ‘Here’s how to do it right.’ … Do most people heed the advice? No, of course not.»

Gopinath, who is 39 today and was barely 38 when she earned tenure, is a rising star in international macroeconomics. Her research interests are timely, considering the volatile financial state of the world.

Gopinath studies how international prices respond to movements in exchange rates, the rapid shifts in relative value among world currencies. She also investigates “sovereign debt,” the catastrophic tip in balance sheets that may suddenly befall individual countries.

To do her work, Gopinath explores both theory and hard data.
Some of her papers are based purely on mathematical formulations. “I try to model the world with features I think are relevant,” she said, “and then see what the behavior of economic agents are in that environment.”

But Gopinath also burrows into mounds of data. What she calls her “pricing project” tracks the cost of goods in minute detail, down to the expense of a pair of shoes from China or a machine made in Germany. Since 2005, she has analyzed the voluminous data behind the import price index that is released monthly by the U.S. Bureau of Labor Statistics.